US dollar peg to blame for high private rentals in Hong Kong

BIO

Jake van der Kamp is a native of the Netherlands, a Canadian citizen, and a longtime Hong Kong resident. He started as a South China Morning Post business reporter in 1978, soon made a career change to investment analyst and returned to the newspaper in 1998 as a financial columnist.

[French economist Thomas] Piketty states that unrestrained capitalism and free markets have caused great inequality ... In Hong Kong this can clearly be seen in rising property prices and rents - where property developers and landlords get rich at the expense of workers' stagnant wages.

Letters to the editor, May 4

I suppose I shall have to inflict that big Thomas Piketty book on myself now. What trials of tedium we must endure when defenders of righteousness pick up their pens. In the meantime, however, let's deal with this Hong Kong angle.

The first chart should set things straight. The blue line on top represents the nominal wage index, flat while the economy went through a severe bout of disinflation from 1998 to 2005 and rising since that time.

The lower red line represents average private housing rents, way down with the disinflation and only back last year where they were in 1998. It was not the wages that were stagnant here.

But, of course most workers do not live in private rental housing. Their landlord is the government's Housing Authority and its rents are on average now about 15 per cent less than they were in 1998.

The figure is, in fact, more like 30 per cent less when you take account of the rent concessions regularly given to public housing tenants.

There, that's that one dusted.

Now the angle on prices. The second chart shows you two closely interwoven lines. One represents the constant maturity yield on US 10-year treasury bills, the other the average gross yield (yearly rent as a percentage of market price) of private rental flats in Hong Kong.

Don't bother yourself with which one is which. They are the same.

Because of the Hong Kong dollar peg to the US dollar our interest rates and yields on all financial assets can vary little from their US equivalents except in times of crisis.

In the US an irresponsible monetary authority, the Federal Reserve Board, has for a prolonged period kept interest rates at record low levels in a vain attempt to stimulate a weary US economy and in a (so far) successful attempt to let government escape paying the price of an addiction to debt. We are forced to follow. What this means is that where an annual rent of HK$100,000 would have put the price of a flat at about HK$1 million in 1984, it now makes that flat worth at least HK$4 million.

We assume no difference in the flat here and no difference in the rent. It is just monetary magic that quadruples the price.

And it is not property developers or landlords who have driven home prices out of the reach of so many people this way. It has happened because we are pegged to the US dollar and because the US Fed is scared to say boo to Washington and Wall Street.

The fact that the rich are the beneficiaries of wealth polarity does not necessarily make them the cause of it, nor does it necessarily make expropriation of their wealth the remedy.

There are downsides to the Peg but I would hate to see the effect if clowns like John Tsang and Norman Chan are free to fiddle with the exchange rate.

hkgamaranto May 6th 20148:03am

Without you, Mr. Van der Kamp, this paper would value zero and Hong Kong people would be without one of the last source of free, unbiased economical (read also political) information.
Do not dare to move out of town again!

babyisthirsty@****** May 7th 201410:37am

Congrats, Jake Van Der Kamp has proved himself to be a "distanced from reality" middle class bobo. So predictable though.

impala May 7th 20148:12am

Sounds like another libertarian feels threatened in his fantasy world view by the irrefutable analysis Prof Piketty has written.

The two graphs are meaningless.

First chart (left): 1. The point is not that NOMINAL wages are or are not stagnant. The point is that REAL wages have been stagnant (or falling) for most people over the past decades. Nominal wages are not interesting nor relevant. What matters is actual standard of living, where real wage growth is the key to an increase in purchasing power for the large majority of the population, especially in Hong Kong.

2. Private rents, indexed conveniently from the high watermark in 1998 huh. This is another example of Mr van der Kamp's intellectual dishonesty; slicing figures the way he sees fit. Extend the data just a couple of years to say, 1992 and you get a wholly different picture, illustrated for example here, by this very newspaper over a year ago:
****www.scmp.com/sites/default/files/2012/10/10/scm_news_housing10.art_1.jpg

The second chart (right) is even more ridiculous. Housing, from an investment perspective, is a simple serial cash flow investment. Of course its yield is highly correlated to the US treasury. On a currency-neutral basis, any serial cash flow investment anywhere in the world will be. Peg or no peg.

Mr van der Kamp proves nothing and is just a grumpy old neo-liberal who thinks the poor (and middle class) should stop whining and get on with it while he counts his riches.

Happy to help. Unfortunately, Mr. van der Kamp does this all the time. His love for charts has little to do with making things easy to understand and a lot with the ease with which they can be manipulated. It must be his background as an investment analyst. One of the first thing any analyst learns is that you can pretty much prove any point you want as long as you are selective enough in your data, and then display this fittingly.

Make no mistake - Mr van der Kamp is a hardcore libertarian. Always he speaks up against any form of government intervention and regulation, and in defence of free markets. He will nearly always pick the side of (big) business, unless perhaps they really have been crossing the line (but see his ridiculous defence of Tiger Asia for am example of even defending clearly wrong-doing fund managers).

And that is all fine, it is a column and opinions are always welcome. What is troubling however are the rhetorical tactics and dishonest data tricks Mr van der Kamp regularly deploys to convince unsuspecting readers of his political-economic point of view as if it is an undeniable fact.

Artie May 9th 20149:42am

In HK as a well developed economy it is such a failure that so many of our young married couples live in a small flat with their parents (and in laws) with no hope of being able to pay for mortgages themselves even if the parents pay for the deposits for them. There is such a high hidden demand for flats that the government fails to see or do not want to see. It is such a shame and creates more social problems.

Artie May 9th 20149:33am

Interesting proposition to link high rent to the peg and not property supply. The peg has allowed HK to have low interest as in the US. HK property prices moves higher as affordability is higher as interest rate decreases. With the higher property prices normally this will encourage more supply in the market. However, supply of land is controlled by the HK govt and further controlled by the few property tycoons. Rental yield decreases because of the high property prices but so has interest cost. I suggest the peg/ low interest effect is neutral on rental prices. Rental will go up when there is increased demand over supply. I would say this is more likely to be affected by supply of flats for rent and increased demand due to higher economic activities in HK and not the peg.

virokick May 8th 20149:01pm

JVDK blames the peg, but than says it's no fault that the rich benefited from it - ok , I get it , how much did the Republican Party or the Heritage Foundation pay Him to write all this?
He escapes from egalitarian Nederland to spread his winner take all concept here.